Capital Ideas: California’s Water “Shortage”

Capital Ideas: California’s Water “Shortage”

KEY POINTS IN THIS BRIEF:

  • Many commentators incorrectly identify California’s historic draught, melting of its snow caps, or a handful of misguided policies as the cause of the state’s current water crisis.
  • The cause of California’s current water crisis is the absence of scarcity pricing based on the supply and demand of water. This is as true today as it was when Dr. Laffer commented on California’s water crisis in 1991.
  • If California is to overcome its current water crisis, it must introduce scarcity pricing based on supply and demand. Once market pricing is implemented, recognizing property rights in water ownership could further alleviate the crisis, by facilitating trades in water supplies.

As California’s current drought entered its fourth year, Governor Jerry Brown imposed mandatory state-wide water restrictions intended to drastically reduce water consumption. The restrictions, a series of guidelines for rationing, rebates, and prohibitions aimed to reduce household and commercial water consumption (notably excluded is agriculture) by 25 percent. These policies are sure to miss the mark as they have when tried in the past.

Several factors have aggravated California’s current crisis, including low levels of precipitation, the emptying of reservoirs to protect some aquatic wildlife, the melting of snow caps, and policies intended to stifle economic and population growth. These factors have all certainly diminished the supply of water. Meanwhile, California’s population growth, though well below its pre-year 2000 pace due to net migration outflows, has remained positive. Population growth has certainly increased the demand for water in the state. However, these factors are not the cause of California’s water crisis.

The cause of California’s current water crisis is the absence of scarcity pricing based on the supply and demand of water. This is nothing new. As Dr. Laffer wrote in the midst of another major California drought back in 1991:

Using rice, cotton and alfalfa farmers as scapegoats for California’s current water crisis is wrong. In fact, why anyone would describe California as having a water shortage is beyond me. The price of water is simply too low and the reason the price of water is too low is because government controls its distribution. It’s as simple as that.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.